“History Doesn't Repeat Itself, but It Often Rhymes” – Mark Twain

It's December already!

As we come to the close of the year in 2025, the markets have just given a weak cheer, having crossed an all-time high both on the Nifty50 as well as the Sensex. But the journey has not been a cheery one. At the start of the year the expectation was for a year of consolidation given elevated valuations of the past couple of years prior to January this year. The asset allocation shifted in favor of fixed income, hybrids or a combination of risk assets, given individual risk preference. As we look toward the start of another year, there are some conflicting signals we must deal with. Let’s look at some burning issues that appear urgent currently.

Burning Issue #1: Is AI a bubble?

We have seen various bubbles in the financial markets, and this appears no different. The internet boom that overtook markets in the late nineties leading to the bust in the year 2000 is a boom-bust story that appears like the current one. As Mark Twain famously remarked “History Doesn't Repeat Itself, but It Often Rhymes”. We all have seen what transpired in later years. We now use the internet so insidiously that we hardly call it the “internet” anymore. It has become a part of our lives.

Similarly, it may yet be the case with AI. While the most hype may be with a certain group of companies for the advantage they have today, they will, in time, be replaced with the emerging technologies that become a part of life as it would progress in the future. We have no sight of it today. Some companies that heralded the internet era and remained relevant for some time, are losing market share, value and relevance. However, only a few truly “internet era” companies survive today, albeit at humungous valuations. One can count them on one’s fingertips.

So, the lesson here is: There are few victors in case AI turns out to be a way of life for most humans in the future and most companies will face harsh reality to become shells of their present selves if history does indeed “rhyme” as Mark Twain opined. Can we find the winner? The survival bias theory tells us that only when we see the survivor that we will know who won. So that’s not something to attempt to do, however what we can do at the present is to ensure that we stay diversified, remain invested and become reasonable in our return expectation that spreads over a long period of time ahead of us. That is the only way to solve the burning issue #1

Burning Issue #2: If there is an AI bubble burst will there be a contagion?

This is a somewhat difficult issue to address. While there is concentration in a few stocks, overall ownership of the same is widespread. This is leading to a “wealth” effect with smaller and individual investors. While most institutional investors will be able to brace a severe drawdown in case the same happens, smaller investors will be at huge risk. Individual investor participation in the United States, either via direct holding or via mutual funds, 401k Plans or retirement allocations is at an all-time high if data from the Federal Reserve is any indication. Source: Board of Governors of the Federal Reserve System (US) via ALFRED®

What does this mean for markets?

Risks are elevated

• While a meltdown appears a very low probability event, a sharp drawdown will also not impact the broader markets too much. Due to the higher participation rate for individual households, the resultant sentiment may turn overly negative

• It is likely that softness in the US markets may spread to global markets, however emerging markets are likely to remain slightly better off

• India will remain under pressure due to uncertain trade policy narrative (so far) but any resolution and an announcement to that effect in the next year will be a short term positive, both from a currency as well as a stock market perspective

India remains largely removed from the AI investment boom. India is neither involved in AI infrastructure (chip design, production etc.) nor in adaption and there are largely no secondary investments even in companies that use AI to enhance productivity. As contrarian it would appear, India will not have a direct impact of any AI meltdown or drawdown. But as indicated earlier secondary impacts may be there.

Asset allocation will be key

Investors are encouraged to review asset allocations from an individual perspective and remain true to their long-term goals no matter what the chatter in the markets appears to be. Making any blanket change in anticipation of events is sheer folly and can be harmful in the long run. Happy investing!